Brazil Real Heads for Fourth Monthly Decline as Deficit Widens. Brazil’s
real was headed for a fourth straight monthly decline as part of a
broad drop in emerging-market currencies after the government’s budget
deficit widened in December to almost the widest since 2009. The
currency depreciated 2 percent to 2.4092 per U.S. dollar in January as
of 3:09 p.m. in Sao Paulo and was little changed for the day. Swap rates on contracts maturing in January
2015 rose three basis points, or 0.03 percentage point, to 11.66
percent, extending their increase this month to 108 basis
points, the most since the global financial crisis in 2008.

Argentine Bonds Plunge Most in Emerging Markets on Outflows.
Argentine dollar bonds tumbled the
most in emerging markets on concern government measures from devaluation
to rate increases aren’t enough to improve the country’s deteriorating
debt payment capacity. Argentine government dollar bonds due 2015 fell
3.88 cents on the dollar to 85.75 cents, driving yields up to 19.12
percent, the highest since June 2012. The extra yield investors
demand to own Argentine bonds over U.S. Treasuries widened 75 basis
points to 1,142 basis points, while the average spread on
emerging-market bonds rose 11 basis points at 10:28 a.m. in New York,
according to JPMorgan Chase & Co.’s EMBIG index.

Asian Currencies Drop in Week on China Slowdown Signs, Fed Taper. Asian
currencies declined for a
third week, led by the Thai baht and Malaysia’s ringgit, amid concern a
slowdown in China and U.S. stimulus cuts will deepen the selloff in
emerging markets. The Bloomberg JPMorgan-Asia Dollar Index (ADXY)
fell 0.1 percent this week as a report signaled China’s manufacturing
contracted for the first time in six months. The Federal Reserve said
Jan. 29 it will pare its monthly bond purchases by $10 billion to $65
billion from February, following a similar reduction in January.
The baht had its worst week in almost a month after global funds
pulled money from the nation’s assets amid concern a Feb. 2
election will trigger more violence.

European Banks Face 5.5% Capital Hurdle in EBA Stress Test. The
largest banks in Europe will have to show their capital won’t dip below
5.5 percent of their assets in an economic crisis, the European Union’s
top banking regulator said. The exercise, which will examine a
sample of 124 banks that cover more than half of each EU member state’s
banking industry, is scheduled to begin around the end of May, the
European Banking Authority said in a statement today. Results will be published at the end of October.

European Stocks Drop, Posting Their Worst January in Four Years. European stocks fell, posting their
worst start to the year since 2010, as companies from Electrolux
AB to Vedanta Resources Plc dropped after reporting results. Electrolux slid the most since August 2011 after earnings
missed analysts’ estimates. Vedanta Resources Plc lost 3.6
percent after saying copper output in Zambia, Australia and
India declined. LVMH Moet Hennessy Louis Vuitton SA jumped 7.9
percent after reporting growth in fashion and leather-goods
sales rebounded in the fourth quarter. The Stoxx Europe 600 Index slipped 0.3 percent to 322.52 at
the close of trading, paring earlier losses of as much as 1.7
percent.

WTI Oil Falls From 2014 High on Emerging Economies.
WTI for March delivery fell 57 cents, or 0.6 percent, to $97.66 a barrel
at 2:19 p.m. on the New York Mercantile Exchange. WTI climbed 0.9
percent to $98.23 yesterday, the highest settlement since Dec. 31. The
volume of all contracts
traded was 13 percent above the 100-day average. Futures are up
1.2 percent this week and down 0.8 percent this month.

House Republicans’ Economic Agenda Targets Middle Class. U.S. House Republican leaders are preparing an economic agenda that
includes energy proposals aimed at lowering utility bills and countering
President Barack Obama’s focus on income inequality, according to a document obtained by Bloomberg News.

CNBC:

IMF calls for ‘urgent action’ amid EM crisis. (video) The International
Monetary Fund (IMF) has responded to the ongoing volatility in emerging
markets by stressing the need for coherent macroeconomic policies and
urgent policy action in some countries. Emerging markets have been
hit over the past week amid concerns that growth in the region will slow
as the U.S. Federal Reserve tightens its monetary policy, draining
global liquidity. A number of emerging market currencies have seen major
falls against the dollar,
with some central banks forced to raise rates and intervene in the
markets to limit the swings.

Economic danger lurks in China’s shadow banks. Of
all the economic dangers to flare up over the past week, the most
unsettling was at first glance also the most esoteric: the near default
of a high-yield loan product held by a few hundred small-time Chinese
investors. First, the direct risks. Credit Equals Gold No. 1 is just one of a wave of
Chinese shadow banking products that will fail to live up to their
outlandishly confident names when they mature this year. The drama over
repayment will be played out again and again.

Abenomics at Risk as Workers Struggle to Keep Up With Inflation.
For his economic strategy to work, the Prime Minister says
earnings at companies like Toyota, where profit is projected to double
to a record 1.86 trillion yen ($18.2 billion) this year, must lead to
higher pay. Employees like Matsui have yet to see the benefits -- in the
11 months through November, pay for the average Japanese worker rose
just 0.2 percent; it’s fallen 15 percent in the past decade and a half.
Japan’s unions will begin contract negotiations next month in labor’s
biggest bid so far to share in the benefits of Abenomics. “This is a litmus test for whether Abenomics works or falls apart,” said Martin Schulz, an economist at Fujitsu
Research Institute in Tokyo. “How can you get growth to go up
without getting money into people’s pockets?”

Emerging Market Rout May Signal ‘Sudden Stop’: Cutting Research.
Brazil, South Africa, Turkey and Ukraine are the emerging markets most
at risk of a “sudden stop,” in the view of Morgan Stanley. That’s
defined as a halt or even a reversal in capital flows into a country,
slashing access to international financial markets for an extended
period and weakening the economy. The term is often linked to 1995
work by Rudi Dornbusch, the late international economics professor at
the Massachusetts Institute of Technology in Cambridge. Mexico,
Indonesia, India and Thailand are also in some jeopardy of such a
phenomenon as investors turn sour on emerging markets, London-based
economists Manoj Pradhan and Patryk Drozdzik said in two reports to
clients over the past week. They wrote as central banks in India, Turkey
and South Africa raised interest rates to shoreup confidence in their
currencies.

Emerging-Market Shocks Pressure Dormant
Volatility: Currencies. Volatility in foreign exchange markets, after
falling to some of the lowest levels since before the financial crisis,
has nowhere to go but up as emerging economies falter, say the world's
biggest dealers. "The market hasn't accepted some of the risk events
that are on the horizon," Ian Stannard, the head of Europe currency
strategy at Morgan Stanley in London, said in a Jan. 27 phone interview.
"Foreign-exchange volatility is still at relatively low levels so
there's scope for it to move higher. China still poses the biggest
spillover risk from emerging markets."

China Making Air Force, Navy Upgrades, U.S. Officials Say.China’s air force is fielding new precision-guided cruise missiles, long-range bombers and drones
as its Navy expands its long-range punch, according to U.S.
military intelligence officials. “While we would not characterize the modernization as
accelerated,” it’s “progressing at a steady pace” and is
significant, Lee Fuell, a director at the Air Force’s National
Air and Space Intelligence Center, said in a presentation
released today.

Rubber Futures in Tokyo Advance, Paring Monthly Loss.
Rubber in Tokyo advanced, paring the biggest monthly decline since May
2012, as increased spending by U.S. consumers raised optimism that
demand for the commodity used in tires may increase. The contract for
delivery in July rose as much as 1.7 percent to 231.8 yen a kilogram
($2,255 a metric ton) on the Tokyo Commodity Exchange, before trading at
230.6 yen at 11:24 a.m. local time. Futures tumbled 16 percent this
month and fell into a bear market amid swelling inventories in China,
the
biggest consumer. Rubber fell 9.3 percent last year.

Ukraine Warring Factions Trade Barbs With President Sick. Ukraine’s
opposition accused Viktor Yanukovych of foul play as the president
placed himself on sick leave and said his rivals are escalating the
nation’s two-month political crisis. The two sides are in dispute
over steps meant to reduce tension in the wake of deadly anti-government
clashes last week. While Yanukovych’s cabinet fell with the Jan. 28
resignation of former Prime Minister Mykola Azarov, the opposition
rejected an
amnesty law for protesters pushed through yesterday and said he
may use illness to avoid canceling anti-protest laws.

Puerto Rico Will Be Cut to Junk Within 30 Days, UBS Says. Puerto Rico’s general-obligation
bonds are poised to be cut to junk within the next month,
according to UBS AG. “Given the myriad obstacles facing Puerto Rico, we believe
that at least one rating agency will take such an action within
the next 30 days,” analysts Thomas McLoughlin and Kristin
Stephens at UBS Wealth Management in New York wrote in a report
dated yesterday.

ECB Seeking to Unmask Weak Banks Wants Risky Loan Details. The
European Central Bank asked Europe’s biggest lenders to disclose loans
on their balance sheets that are at risk of default as part of its
review of the health of the region’s financial system. Banks also had to
provide figures on loans they have
restructured for clients, a document distributed to 128 banks
taking part in an asset quality review and obtained by Bloomberg
showed. The document, in the form of an excel spreadsheet, asked
banks to note how many of their loans classified as
“performing” have already been restructured, and how many
loans that don’t yet meet the standard definition of non-performing -- 90 days past due -- are “unlikely to pay.”

Bonds Prove Bears Wrong in Best Start Since 2008 as Stocks Tank. Bonds are up, stocks are down and
it’s snowing in Atlanta. The start of the year in financial markets has gone as
almost no one expected, with fixed-income assets worldwide
posting their biggest January returns since 2008 and equity
prices falling the most since 2010. Gold, given up for dead in
2013 as prices tumbled 28 percent, is rallying.

Selloff's Spread to Europe Is Sign of Broad Fear. Until This Week, European Emerging Markets Had Largely Dodged Weakness That Hit Peers Elsewhere.
Until this week, European emerging markets had largely dodged the
vicious selloff that has swept through their peers elsewhere. Now, they
are cracking. The Hungarian forint took a heavy blow early Thursday,
dropping as much as 1% against the dollar. The Polish zloty and the
Czech koruna also stumbled. The currencies clawed back
some ground late in the day, but analysts cited Thursday's gyrations as a
sign that the market's fear of investments seen as risky is broad.
Whether bouts of weakness in such countries persist will be a barometer
of wider emerging-market strains.

Fox News:

House GOP leaders back limited path to legal status for illegal immigrants. House Republican leaders on Thursday endorsed a limited path to legal
status for some illegal immigrants, in a move Democrats said could open
the door to a deal on comprehensive immigration legislation. The
position was included in a document released by party leaders during
their annual retreat in Maryland. The "standards for immigration reform"
document ruled out a special path to citizenship for illegal
immigrants.

CNBC:

Blankfein’s pay to rise 10% to $23 million for 2013. Lloyd
Blankfein, chairman and chief executive of Goldman Sachs, may earn as
much as $23 million in 2013 – a 10 percent increase on the
previous year – despite the bank's struggle to overcome a slump in fixed
income trading.

Will Argentina’s woes hit this country? (video) Argentina's latest monetary ailment may prove contagious for some
of its Latin American neighbors, with Brazil likely to be the first to
catch the fever. "What has been happening in Argentina will
have a negative impact on the Brazilian economy," Tony Volpon, a
strategist for Latin America at Nomura, told CNBC, citing long-standing
trade ties. "For example, about 70-80 percent of Brazilian car exports
actually go to Argentina. So they are vulnerable."

Will the emerging market rout get even worse? Watch corporate bonds. Global investors have suddenly remembered that emerging markets have a rich, recent history of florid financial crises. The cracks are starting to emerge everywhere:
wobbly “wealth management products” in China, the Turkish lira’s
tumble, the selloff in Brazilian bond markets and last summer’s
mini-rupee crisis.

The Employment Cost Index for 4Q is estimated to rise +.4% versus a +.4% gain in 3Q.

Personal Income for December is estimated to rise +.2% versus a +.2% gain in November.

Personal Spending for December is estimated to rise +.2% versus a +.5% gain in November.

PCE Core for December is estimated to rise +.1% versus a +.1% gain in November.

9:45 am EST

Chicago Purchasing Manager for January is estimated to fall to 59.0 versus a reading of 59.1 in December.

9:55 am EST

Final Univ. of Michigan Consumer Confidence for January is estimated to rise to 81.0 versus a prior estimate of 80.4.

Upcoming Splits

(TD) 2-for-1

Other Potential Market Movers

The China Manufacturing PMI, Eurozone CPI and the Eurozone Unemployment rate could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by commodity
and industrial shares in the region. I expect US stocks to open
modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

Rajan Warns of Global Policy Breakdown as Emerging Markets Slide. India
central bank Governor Raghuram Rajan warned of a breakdown in global
policy coordination a day after the Federal Reserve further cut
stimulus, weakening emerging-market currencies from the rupee to the
Turkish lira. Rajan, a former chief economist at the International
Monetary Fund, called for greater cooperation among policy makers weeks
before finance chiefs from the world’s top developed and emerging
markets gather in Sydney. The Fed’s
statement yesterday made no mention of developing economies.

Japan Inc Profits Boom Masks Fading Export Gains From Yen. Soaring profits among Japanese
manufacturers are masking weakness in exports as the yen’s slide
against the dollar fails to deliver the boost seen after
previous bouts of currency depreciation. Export volumes fell 1.5 percent in 2013 from the previous
year, Finance Ministry data show, even following a 12 percent
decline in the yen against the dollar during 2012. That
contrasts with a 7.8 percent surge in 2006 after a similar
currency move.

Abe Doomsday Risk Prompts Moody's Warning on JGBs: Japan Credit.
Moody's Investors Service says Japan's biggest banks need to cut bond
holdings and boost loans to protect their balance sheets from potential
losses should Prime Minister Shinzo Abe's stimulus spur yield surges.
Lenders' stockpiles of sovereign debt were at 138.9 trillion yen($1.36
trillion) in November, after peaking at a record 171 trillion yen in
March 2012, Bank of Japan data show. "Banks need to rebalance their
portfolios away from JGBs," Graeme Knowd, a Tokyo-based associate
managing director at Moody's who overseas financial institutions, said
in a phone interview. "It if turns out that Abenomics hasn't worked and
only ended up leaving Japan with a bigger pile of debt," a "doomsday
scenario for JGBs" isn't "a zero probability scenario," he said.

Ukrainian Bonds Tumble Second Day as Russia Threatens Aid Delay. Ukrainian bonds slumped, pushing
yields to a six-week high, as Russia threatened to delay an aid
package and President Viktor Yanukovych refused to unconditionally pardon protesters. Yields on dollar-denominated debt due in June surged 127 basis points to 13.25 percent at 2:48 p.m. in Kiev, the highest since Dec. 16 on a closing basis. The cost of insuring the country’s debt with credit-default swaps jumped 50 basis points to 1,004 basis points, Europe’s highest, according to CMA data.

Lift 'EM Cookie Crumble' Hedges as Tightening Hurts Growth: HSBC.
Further accumulation of "EM cookie crumble" hedges is warranted for
developed-market investors, Bert Lourenco, head of EMEA rates research
at HSBC, writes in e-mailed comments. Only way for EM countries to stop
capital outflows is to raise rates to reset a financing equilibrium -
and in turn destroy domestic demand. Cumulative impact of just about
every major emerging-market policy tightening will probably be negative
for global growth outlook and risky assets.

Diageo’s Sales Growth Trails Estimates Amid China Cutbacks.
Diageo Plc (DGE), the world’s biggest distiller, said a slowdown in
emerging markets including China and Nigeria weighed on first-half sales
growth, sending the shares down the most since 2009. “Diageo is not
immune to broader macroeconomic pressures, especially at present in many
key emerging markets,” Eddy Hargreaves, an analyst at Canaccord in
London, said in a note.

Oil, Mining Stocks Face Emerging-Currency Risk: Chart of the Day.
Energy and raw-material producers may have the most at stake among U.S.
stocks as emerging-market currencies fall, according to Gina Martin
Adams, a Wells Fargo strategist. "High correlations between
emerging-market currencies and commodity prices suggest
commodity-sensitive sectors in the S&P 500 are likely to suffer
most" as the decline worsens, Martin Adams wrote in a report.

Consumer Confidence in U.S. Fell Last Week to Two-Month Low. Consumer confidence dropped last week to the lowest level in two months as more Americans said it was not a good time to shop. The
Bloomberg Consumer Comfort Index declined to minus 31.8 in the week
ended Jan. 26 from minus 31 reading the prior period. The buying-climate
gauge slumped to a three-month low.

Outlook for company profits is getting pretty ugly. (video) Some 80 percent of those companies have lowered their outlook, according
to S&P Capital IQ, contradicting the widely held narrative that the
economy is beginning to achieve the escape velocity it needs to attain a
full-fledged recovery.

Potash Corp(POT) sees weaker than expected year ahead, shares dive. Potash Corp of Saskatchewan
, the world's biggest fertilizer company, on Thursday
reported a sharply lower quarterly profit and produced 2014
forecasts that were below Wall Street expectations.The company's disappointing outlook shows that the global
potash market has far to go to recover from a slide in prices,
due to years of soft demand, burgeoning supplies and last
summer's breakup of rival Belarusian Potash Company (BPC).

Emerging market currency falls in graphs. Emerging markets are experiencing the worst rout in five years, with their
currencies plummeting against the dollar. Here we take a look at those
countries most exposed to risk.

The positions and strategies discussed on BETWEEN THE HEDGES are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor of this blog holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in anyway, considered liable for the investment performance of any securities or strategies discussed.